Core views:

Financial indicators outlook: We expect Alibaba's FY2025Q2 (corresponding to the natural year 2024Q3) to achieve total revenue of 239.6 billion yuan (YoY +7%, QoQ -1%), adjusted EBITA fell 7% year over year to 39.8 billion yuan, and adjusted EBITA margin was 17%; of these, Taotian Group expects revenue of 101.3 billion yuan (YoY +4%, QoQ -11%), and Taotian Group's adjusted EbitaMargin is 44%; Alibaba Digital Business Group's estimated revenue is 31.3 billion yuan (YoY +28%, QoQ +7%); Alibaba Digital Business Group's adjusted eBitaMargin is -11%; Cloud Intelligence Group's estimated revenue is 29.9 billion yuan (YoY +8%, QoQ +13%), and Cloud Intelligence Group's adjusted EBITA margin is 8%.

Taotian Group: Taotian Group's GMV growth rate has slowed, and the overall monetization rate has stabilized. We expect FY2025Q2 Taotian Group's revenue to increase 4% year on year to 101.3 billion yuan, of which China's retail sales will increase 3% year on year to 95.5 billion yuan. We expect FY2025Q2 Taotian Group's GMV growth rate to slow month-on-month, mainly due to: 1) consumption showed a steady recovery. According to data from the National Bureau of Statistics, from January to September 2024, the total retail sales of social consumer goods in the country increased by 3.3% year on year, and online retail sales of physical goods grew 7.9% year on year; 2) Taobao increased revenue by 1,000 Basic software service fees are somewhat overshadowed by GMV for some monetization rate sensitive merchants; however, site-wide promotion tools and Taobao's increase in basic software service fees have stabilized Taotian Group's overall monetization rate. We expect FY2025Q2 customer management revenue (including commissions) to increase 2% year-on-year to 70 billion yuan. The platform maintains investment in price competitiveness, consumer experience, and AI applications. We expect FY2025Q2 Taotian Group's adjusted EBITA to drop 6% year-on-year to 44.3 billion yuan, and the adjusted EBITA margin is 44%.

Ali International Digital Business Group: The business of various international business platforms has maintained strong growth. We expect the overall revenue of FY2025Q2 of Ali International Digital Commerce Group to increase 28% year over year to 31.3 billion yuan, of which 1) international retail sales will achieve revenue of 25.1 billion yuan (YoY +32%). We expect it to be mainly driven by strong growth in AIDC's retail platforms. Among them, AliExpress will benefit from strong growth in AE Choice's business; 2) the international wholesale business will achieve revenue of 6.2 billion yuan (YoY +12%), which continues to be stable. Overall, the company maintains investment in cross-border business, but thanks to continued improvements in the UE model for some businesses, the loss margin of the international business sector is expected to narrow month-on-month. We expect the adjusted EBITA of FY2025Q2 to be -3.3 billion yuan, and the adjusted EBITA margin will be -11%.

Cloud Intelligence Group: AI drives cloud revenue growth, and the strategy focuses on public clouds and improving profitability. We expect FY2025Q2 Cloud Intelligence Group's revenue to increase 8% year over year to 29.9 billion yuan, mainly driven by cloud product price reduction and AI product revenue generation. The company's strategy focuses on public cloud, and at the same time continuously improves revenue quality by reducing low-profit margin projects to offset the impact of price reductions on public cloud products to a certain extent. We expect FY2025Q2 Cloud Intelligence Group to adjust EBITA to 2.4 billion yuan, and the adjusted EBITA margin to 8%.

Profit forecast and investment rating: Considering the gradual recovery of the company's revenue growth rate, but still in the core business investment period, we adjusted the profit forecast. We expect the company's FY2025-2027 revenue to be 1010/1117.7/1231.4 billion yuan respectively, net profit to mother of 101.9/123.8/143.3 billion yuan, and non-GAAP net profit to mother of 158.2/172.4/196.8 billion yuan, respectively. The corresponding diluted EPS is 5.1 /6.2/7.2 yuan, corresponding P/E is 17x/14x/12x, and the corresponding non-GAAP P/E is 11x/10x/9x; according to the SOTP valuation method, we gave Alibaba a total target market value of 2070.8 billion yuan for fiscal year 2025, corresponding to a target price of 108 yuan/HK$118, maintaining a “buy” rating.

Risk warning: Macroeconomic growth falls short of expectations; risk of policy supervision and valuation adjustments in the Internet industry; increased market competition; industry growth falls short of expectations; excessive diversification of business and insufficient organizational coordination; forward-looking performance forecasts are for reference only.